The IRS has revoked a taxpayer-favorable private letter ruling issued earlier this year in which the IRS concluded that no portion of the purchase price of certain wind facilities was required to be allocated to existing power purchase agreements (PPAs) as separate assets for purposes of determining the purchaser's tax basis.
The taxpayer in the original ruling (Priv Ltr Rul 201214007) acquired wind facilities with above-market, facility-specific PPAs. The IRS concluded that no portion of the purchase price was required to be allocated to the PPAs as separate assets for purposes of determining the taxpayer's basis. Rather, the IRS concluded that the portion of the purchase price otherwise attributable to the PPAs should be allocated instead to the taxpayer's tax basis in the turbines and other physical assets. Thus, the IRS concluded in the original ruling that the taxpayer could recover the costs attributable to the PPAs through increased depreciation deductions with respect to the physical assets, rather than treating the PPAs as separately amortizable intangible assets.
The IRS essentially concluded that, under the specific facts presented, the costs allocable to the PPAs were more properly treated as part of the cost of the physical assets than costs to acquire separate intangible assets. The IRS arrived at this conclusion even the though the price of electricity under the PPAs was above the then-prevailing market price for electricity and the PPAs therefore were arguably valuable assets.
The original ruling appeared to provide a significant tax benefit for taxpayers purchasing facilities with "facility-specific" PPAs. The original ruling was surprising to many practitioners in that it represented a taxpayer-favorable interpretation of a somewhat uncertain issue. In addition, the Treasury Department took a contrary position for purposes of calculating the amount of the Section 1603 Grant.
In its revocation notice (Priv Ltr Rul 201249013), the IRS states that the original ruling "is not in accord with the current views of the [IRS]" and concludes that "the portion of the purchase price paid by the [t]axpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities."
The revocation leaves a number of open issues and questions unanswered. These include the implications for allocating the purchase price of a facility to other project agreements, and how to value a PPA and other agreements for purposes of allocating the purchase price.